Gresham’s Law of Payments

Gresham’s Law is usually stated simply as ‘the bad currency drives out the good’ and it refers to a time when all transactions used coins. If you had to buy one pound’s worth of merchandise and you had two coins – one which you knew contained one pound’s worth of gold and another where some of the gold had been shaved off – you would pass the second coin and keep the fi rst one. In that way, most of the transactions would take place using the inferior transaction medium and the superior one would play a minor role. Note that this can occur only if both the inferior and superior transaction medium were accepted at the same price, or in modern parlance, the price signals were not getting through to the users.